Following on from our article last month about the global supply chain issues, we would like to provide you with an update on other factors which are causing further challenges for us and many others.
Overseas disruptions are continuing to cause delays and setbacks across the entire supply chain. We are experiencing these issues, as are many other companies across the country. Port closures, port congestion, and container shortages are no longer the only issue we are facing. We always aim to give the best service to all our customers and make it a top priority to keep customers informed with continual updates.
Due to factors beyond our control, we are experiencing cost changes which we are unable to absorb without your support. We are communicating these increases at the earliest possible stage to help with your preparation and planning. Below is an overview of the factors which are influencing these increases.
Freight and transport logistics
Supply chain issues have quickly become a nationwide and global problem. These issues have amplified over time as many factors have risen to seriously disrupt the supply of products in every industry from automotive to technology. In the UK, even the larger brands such as Nandos, BP, McDonalds, and Iceland have all reported problems ranging from staff shortages, temporary site closures, and cancelled deliveries to limited availability of certain product lines. These big brands are far from the only victims to this crisis. Smaller companies have also been hard hit and are tackling these hurdles. This is a global issue which has seen enormous freight increases from overseas, which are now being followed by increases from Europe. The Freightos Baltic Index shows how the freight rates continue to rise:
Container shortage
Freight cost increases are simply the result of high demand for the service and limited capacity to handle it. Around ninety percent of goods bought and sold around the globe are transported via sea freight. The knock-on effect of this price increase is therefore felt globally. Initially rising in the far east, European freight costs are now following the same inevitable trend. The Freightos Baltic Index shows how the freight rates continue to rise:
European Driver Shortage
UK news headlines have already highlighted the significant HGV driver shortage, with COVID-19 and Brexit being identified as the main causal factors. EU nationals have either opted to return home during the pandemic or are put off from working in the UK by increased paperwork and complex visa applications. A recent study has estimated that there are approximately sixteen thousand fewer EU nationals working in the UK as HGV drivers in the year ending March 2021 than in the previous year.
Irrespective of the cause, the effect has been to compound the existing delays at ports. Importers and domestic manufacturers are seeing increased delivery lead times as understaffed transport hubs struggle to work through a growing backlog of consignments.
Cost of Production
Raw materials continue to be at a high level which are in turn impacting manufacturing costs, both in the UK and overseas. The high costs we are seeing are largely attributed to the factors outlined below:
Oil & Gas, and Plastic:
The reduction in air travel and private transport during various global lockdowns saw oil prices drop to record lows in 2020. Output at refineries consequently dropped, and with it the output of the by-product naphtha, the building block of many commodity plastics. At the same time, demand for polymers increased significantly with the need for medical equipment and PPE, as well as a boom in online retail packaging and clothing. This shortage of supply, coupled with increased demand caused polymer prices to rise sharply to record highs.
Oil prices have more recently risen to a three year high as economies emerge from COVID restrictions and consumption has rapidly increased.
The price of Natural gas has also increased to record levels due to supply and demand, driving further increases of polymers refined from ethylene, propylene, etc.
Packaging & Pallets:
Demand for paper, card, and wood are continuing to experience increased demand and as a result, prices have increased. Furthermore, the need for pallets is also at an all-time high resulting in a 400% increase in cost
Imports from Europe:
Europe’s exposure to frustrations in the Far East supply chain was highlighted in 2020-21, many businesses have subsequently moved production to Europe to combat the freight costs and secure their lead times. The knock-on effect has of course been the rapid increase in pressures on European manufacturing and freight infrastructure. Consequently, widespread price increases are being seen across the continent.
Energy:
Recent reporting on worldwide energy supplies, specifically natural gas, are a concern we anticipate will influence future pricing. As with the current situation, we will endeavour to provide updates at the earliest opportunity.
Overview
Amidst the current frustrations UK business is experiencing, we should take heart from the fact that the economy is rebounding, with growth more rapid and widespread than previously expected. Unfortunately, whilst both the UK and global infrastructure are not coping, inflationary pressure on the whole value chain means we need to manage increases intelligently and judiciously.
Cromwell is well placed to make the best of the current situation, with our large inventory and stock holding, supported by long standing trading relationships with manufacturing partners, raw material suppliers, and logistics operators. We continue to build our UK processing capability for polythene recycling and film and bag production, and to mitigate price increases and safeguard against stock outages in future we are also accelerating our work on our range consolidation. We are looking forward to sharing innovations on products which will help lessen the effect of increases.
We should like to take this opportunity to thank you for your understanding and ongoing cooperation during these challenging times. Our sales team will be contacting every customer to discuss specific price details as soon as possible, meanwhile, should you have any questions, please do not hesitate to contact us.